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Mastering Financial Modelling: A Step-by-Step Guide for Beginners

Posted on by Imarticus Learning

Financial modelling is a vital component of financial analysis. Building financial models is extremely crucial to the success of a business or project.

Financial modelling offers a structured approach to analysing investments, assessing business performance, and making well-informed decisions. It is a versatile tool that can be applied to many complex financial scenarios.

To construct a sturdy and precise financial model, it is crucial to comprehend its fundamental elements and the essential financial metrics and ratios used in financial analysis. This article will help you master financial modelling by exploring these components and various financial modelling techniques.

Basics of Financial Modelling

Financial models are the income statement, balance sheet, and cash flow statement at their core. The income statement, also known as the profit and loss statement, presents a company’s revenues, expenses, and net income over a specific period. The balance sheet offers snapshots of a company’s financial positions at specific points in time, displaying its assets, liabilities, and equity. The cash flow statement tracks the movement of cash in and out of a business, highlighting its cash inflows from operations, investments and financing activities.

In addition to these fundamental components, financial models depend on assumptions, which are estimates or forecasts about future events. These assumptions consider sales growth, operating costs, interest rates, tax rates and many other factors. The accuracy of a financial model relies heavily on the quality of its assumptions.

Key Financial Metrics and Ratios

Critical financial metrics and ratios help us evaluate a business’s financial performance. Profitability metrics, including gross profit margin, operating profit margin, and net profit margin, gauge a company’s capability to generate profits from its operations. Liquidity metrics (such as the current and quick ratios) evaluate a company’s ability to meet its short-term obligations. Solvency metrics (such as the debt-to-equity ratio and interest coverage ratio) assess a company’s long-term financial stability and capacity to service its debt.

Data Sources and Validation

Reliable and current financial data is indispensable for constructing dependable financial models. Various sources for acquiring financial data include financial statements, market data, industry reports, and government databases. It is essential to validate the data used in financial models to ensure its accuracy and dependability. Data validation entails examining for errors, inconsistencies, and data outliers. By validating the data, you can enhance the credibility and accuracy of your financial models.

Leveraging Excel for Financial Modelling

Excel is extensively utilised for financial modelling due to its robust capabilities. Mastering crucial Excel functions and formulas enables the creation of adaptable models that can adjust to changing conditions and assumptions.

Key Excel functions for financial modelling comprise SUM, IF, VLOOKUP, and PMT. The SUM function calculates the total of a cell range, while the IF function allows for different calculations based on specific conditions. VLOOKUP is employed to locate a value in a table and retrieve a corresponding value from another column. The PMT function computes the periodic payment for a loan or investment.

Aside from these fundamental functions, numerous other Excel functions, including AVERAGE, MAX, MIN, COUNT, and COUNTIF, can be utilised in financial modelling. Multiple calculations and analyses can be performed within financial models by comprehending and effectively using these functions.

Creating dynamic financial models involves using formulas and references linked to data cells, enabling easy model updates when assumptions or input data change. Incorporating flexibility into models permits the analysis of different scenarios and the assessment of the impact of various factors on financial results.

Advanced Excel techniques can further improve the efficiency and functionality of financial models. Data validation ensures that entered data meets specific criteria, averting errors and inconsistencies. Pivot tables are valuable for summarising and analysing large datasets, and facilitating easy identification of trends and patterns. Macros automate repetitive tasks, saving time and minimising the risk of errors.

Building a Solid Financial Model

When building a robust financial model, it is crucial to clearly define its scope and objectives. By outlining the model’s purpose, you can ensure that it addresses the specific business inquiries you need to address, enabling you to concentrate on the most relevant aspects and avoid unnecessary complexity.

Developing Our Assumptions

The formulation of assumptions is another pivotal phase in creating a financial model. Assumptions are estimations or forecasts about future events that serve as the groundwork for the model. These assumptions can cover sales growth, operating costs, interest rates, tax rates etc. We must identify and make rational assumptions based on available data, industry trends, and expert insight.

Constructing Our Financial Statements

After establishing the assumptions, the next step is to construct the financial statements. The primary financial statements consist of the income statement, balance sheet, and cash flow statement. These statements are interconnected, and changes in one can impact the others. A comprehensive financial model can be developed to provide a clear overview of a company’s financial performance and position by constructing these statements accurately and consistently.

Scenario Analysis and Sensitivity Testing

Scenario analysis and sensitivity testing are valuable tools for assessing the impact of different assumptions on model outcomes. Scenario analysis involves creating alternative scenarios based on different sets of assumptions. We can evaluate the potential risks and rewards associated with various decision-making options by analysing these options. Sensitivity testing involves examining how the model’s results change when key assumptions are varied. This can help you identify the assumptions impacting the model’s outcomes and focus attention on those areas.

Best Practices for Effective Financial Modelling

Ensuring the accuracy and reliability of financial models requires validating model results and conducting regular audits. Identifying discrepancies and making necessary adjustments is possible by comparing model outputs to actual results. Regular audits can also identify potential errors or biases in the model.

Communicating Model Outputs

Stakeholders’ understanding of the implications of the model’s findings relies on effective communication of model results. We can use clear visualisations, such as charts and graphs to convey complex information in a digestible manner. Accompanying the visualisations with concise explanations provides context and highlights key takeaways.

Ethical Considerations

Ethical considerations are crucial in financial modelling to avoid biases in the model’s assumptions and ensure transparency and lack of bias. Maintaining the credibility and integrity of financial models is possible by providing clear documentation of the model’s inputs, assumptions, and outputs and adhering to ethical principles.

Types of Financial Models

There are many financial modelling techniques we can use for financial analysis. Let us look at some popular financial models.

DCF Valuation and Capital Budgeting

Discounted cash flow (DCF) valuation is a fundamental method used to estimate the intrinsic value of an asset or investment. We project future cash flows and discount them to their present value using a discount rate in this type of financial modeling and valuation. DCF is widely used in capital budgeting decisions, where it helps assess the profitability of potential investments and determine whether they are worthwhile.   

To perform DCF valuation, you need to forecast the future cash flows that an asset or investment is expected to generate. This involves making assumptions about sales growth, operating costs, capital expenditures, tax rates and other factors. Once the cash flows are projected, they are discounted back to their present value using a discount rate that reflects the risk associated with the investment. The present value of the future cash flows represents the original value of the asset or investment.   

Mergers and Acquisitions Analysis

Financial models play a crucial role in evaluating merger and acquisition opportunities. Analysts can assess the potential synergies, risks, and financial implications of a merger or acquisition by constructing detailed financial models of the target company and the combined entity.

Key considerations in merger and acquisition analysis include:

  • Synergy analysis: Identifying potential cost savings, revenue growth, or other benefits that may arise from a combination of the two companies.   
  • Valuation: Determining the fair value of the target company using various valuation methods, such as DCF, comparable company analysis, and precedent transaction analysis.
  • Financing: Evaluating the financing options available for the acquisition and assessing the impact of debt on the combined entity’s financial profile.   
  • Post-merger integration: Developing a plan to integrate the two companies’ operations and ensuring a smooth transition.   

Risk Management and Scenario Planning

Financial models can assess and manage risk by incorporating uncertainty into the analysis. Stress testing involves subjecting a model to extreme scenarios, such as economic downturns or market crashes, to evaluate the model’s sensitivity to risk factors. Scenario planning involves creating different possible scenarios and analysing the potential impact of all these scenarios on the business’s financial performance.   

By conducting stress testing and scenario planning, you can identify potential risks and develop contingency plans to mitigate their impact. This can help you make more informed decisions and improve the resilience of your business.   

Industry-Specific Modelling

The specific challenges and considerations in financial modelling can vary depending on the industry. For example, modelling a technology company may require forecasting research and development expenses and assessing the impact of technological advancements. Modelling a healthcare company may involve considering factors such as regulatory changes, drug development pipelines and insurance reimbursement rates.

Understanding the unique characteristics of your industry is essential for developing accurate and relevant financial models. By considering industry-specific factors and using appropriate modelling techniques, you can gain valuable insights into your business and make informed decisions.

Wrapping Up

Mastering the basics of financial modelling, and using tools such as Excel efficiently can help you develop into a skilled financial analyst who can make well-informed and influential decisions. It is also important to keep the best practices in mind.

If you wish to become a financial analyst, enrol in Imarticus Learning’s Postgraduate Financial Analysis Program. This financial analysis course will teach you all the essential financial modelling techniques needed to become a financial analysis expert.

Frequently Asked Questions

What is financial modelling and how is it different from financial statements?

A financial model predicts future financial performance, while a financial statement documents a company’s past financial activities.

How can I improve the accuracy of my financial model?

Enhance the accuracy of your financial model by updating it regularly with the latest data, using reliable assumptions, and validating the results against actual performance.

What are some common mistakes made in financial modelling?

Common errors in financial modelling include using outdated data, making unrealistic assumptions, and overlooking risk factors.

How can I use financial modelling to make better investment decisions?

Utilise financial modelling to evaluate potential returns and risks of investments, compare investment options, and make well-informed decisions.

Top 10 Financial Modelling Skills

Posted on by Imarticus Learning

The latest technological development has opened new horizons for the banking and financial services industries. Gaining financial modeling skills has been one such development that relies on using complex data sets to obtain valuable insights for businesses that boost their financial prospects. 

What is Financial Modeling

Financial modeling can be broadly explained as creating a representation of real-world financial situations by factoring in all important variables that might influence the numbers.

What is a Financial Model Used For

Finance Modeling usually entails mathematical models that depict the performance of financial assets and projects. It helps to make a more informed investment decision and choose the most profitable investment avenues. 

How Can You Learn Financial Modeling

One can easily opt for financial modeling certification from reputed institutions like Imarticus Learning and learn all about the field as it also provides you with a job assurance.

Financial Analyst course

Most Important Financial Modeling Skills 

Now that we have a clear understanding of what is financial modeling all about, let’s delve deeper into the prominent financial modeling skills required to succeed in this field.

Accounting

One of the first and foremost financial modeling skills that you need to hone if you want to excel in this job role is accounting skills. Your accounting fundamentals should be very clear, and you should be well versed in all necessary financial statements so that you can figure out any discrepancies and make necessary adjustments.

Forecasting

Your job as a financial modeller also involves making predictions based on data that you have gathered and analysed. You need to be able to forecast based on the historical and present data of the business after factoring in the necessary assumptions. It also involves taking into consideration the qualitative factors, such as the management team and culture, that might have an impact over the outcome.

Solution-Oriented

Another important type of financial modeling skills that you should add to your arsenal is being solution-oriented. You need to have a problem-solving mindset if you want to succeed in this industry. You should learn to think logically and organise your thoughts while finding solutions to problems. You should also be mindful of the flow of information in your presentation so that it is easily understandable.

Simplification

Being a financial modeller, you need to present a simple and easy to grasp picture to your superiors after analysing the complex data sets that might not make much sense to many in their raw form. Simplification of complex information is also a very important skill that will help you succeed in this domain.

Attention to details

You just can’t succeed without honing this skill. Attention to details is one of the most essential skill-set that you need to have if your role involves conducting complex analysis. You need to be mindful of each and every factor that might affect the final outcome and how it changes the equation.

Analytical skills

This one is an absolute no-brainer, working as a financial modeller, you will have to analyse huge volumes of data that are relevant to your organisation. This requires you to have impeccable analytical skills.

Presentation skills

Your role as a financial modeller doesn’t just involve gathering and analysing information. You are also responsible for simplifying complex information and presenting it in such a way that it is easy to comprehend and make sense.

Connecting financial statements

This is also one of the essential financial modeling skills that you will require in your career. You have to process all relevant financial statements, including balance sheet, income statement, and cash flow statement. You need to be able to connect the dots between these three while conducting your research.

Strategic thinking

You need to be a strategic thinker to make better predictions based on your findings using the company’s financial data. It is not a necessity, but it will surely help you climb up the ladder faster.

Proficient in Excel

This is undoubtedly the most vital skill that every financial model professional should hone. It’s a prerequisite for all financial modeling related roles, and the better you master using Excel, the more efficient your results will be.

Financial Modeling Skills

Decoding Financial Modelling: Building Insights for Informed Strategies

Posted on by Imarticus Learning

Financial modelling can be a vast term for those indulging in it for the first time. However, it is extremely beneficial and holds a vast amount of scope for enthusiasts. An investment banking course can be the right fit for professionals looking to upgrade in this field. 

At the same time, it encompasses multiple areas such as historical data processing, assumptions, and forecasting the financial future. 

Although financial modelling involves a multitude of options, it is always advisable to experiment and go for the best model for one’s business. When it comes to investment banking, financial modelling offers a clear pathway to calculate and predict a business’s finances. 

Although the modelling styles may differ, it all comes down to making informed decisions on areas such as the allocation of budget, and resources. The primary goal of investment banking, however, remains planning for the near and far future.

But how does one know if they’re cut out for financial modelling? Buckle up to understand how an investment banking course can benefit you. Additionally, you can invest in financial modelling to reap the best benefits.

What is Financial Modelling? 

Financial modelling includes reasoning and planning for the future based on current records and market conditions. It includes all facets of investment including allocation of budget, assigning different models, and predicting an output.

Financial modelling is a vital measure when it comes to planning out a proposed project. Through financial modelling, companies can benefit from previously-tested models of forecasting profit. At the same time, it can act as a soothsayer for new companies joining the market.

Let’s say a company is planning to invest in stocks but lacks the tools to do that. Financial modelling can prove to be essential at such a juncture. With financial modelling, executives can easily predict the outcome of a specific action as well as work towards the same thing. 

To understand more about the intricacies of this job, opt for certification in investment banking.

Purpose and Importance of Financial Modelling in Investment Banking 

Financial modelling is the perfect fit when it comes to investment banking. A career in investment banking can be rewarding depending on the multitude of projects at hand. Remember, that it includes decision-making, valuation, forecasting, capital budgeting, and investor relations. Here are just some of the reasons why they go hand in hand.

  • Valuation: When valuation is in the picture, it is easier to predict for companies to move forward with a clear-cut picture of their past performances. 

In a situation where the company is planning to invest in further outcomes, it is best to start with the valuation itself. But how does financial modelling help with valuation? 

It incorporates different variables like financial statements, and growth projections, concerning market conditions. In turn, companies can negotiate with definite figures.

  • Forecasting: It is no suspense that financial modelling can aid in forecasting investment returns in no time. Forecasting essentially helps out with a list of things such as projecting revenue, cash flows, and expenses. Apart from this, other important metrics are implemented for predicting future outcomes. 
  • Scenario analysis: Scenario analysis involves the prediction of an occurrence in the future marked by existing trends. It tells the investors about the areas in which their company is making a notable difference. 

This is ideal when assessing problematic situations and coming up with contingency plans. Imarticus’s Investment banking courses deal with troubleshooting as part of their curriculum.

Key Concepts in Financial Modelling

One of the advantages of going for investment banking internships is that it prepares you for the key concepts surrounding the job. The fundamental concepts of financial modelling include creating a process for determining expenses and earnings. These are further divided into these models:

Time Value of Money (TVM): The Time Value of Money concept constitutes one of the primary models of investment banking. The idea of TVM lies in the trend that a note worth 1$ in the market will transform multiple-fold more in the upcoming years. 

It is a popular principle in finance and is used to represent the present value of future cash flows and calculate loan repayments. Additionally, it serves as an essential testament to investing the right way.

Forecasting and Projection Techniques: Banking courses teach about the various types of techniques used by investment bankers in financial modelling including forecasting and projections models. 

These models include the straight-line method, simple linear regression, multiple linear regression, moving average, time series analysis, regression analysis, scenario and sensitivity analysis, and the Monte-Carlos simulation technique.

Discounted Cash Flow (DCF) Analysis: DCF analysis focuses on a popular technique that estimates future cash inflows and discounts them to their present-day value. It starts by estimating the revenue, expenses, and capital expenditures after which it exercises the weighted average cost of capital (WACC) or the capital asset pricing model (CAPM).

Sensitivity Analysis: Sensitivity analysis involves the part where the key figures in the financial model such as interest, and exchange rates are taken into account. These are then run using multiple scenarios with different sets of variables to determine the possible outcome of a model. A career in banking can require more of this type of analysis.

Scenario Analysis: Scenario analysis is another technique in financial modelling that determines the overall impact of a market condition on the business’s future. This technique involves enabling different scenarios to understand the financial results. 

The scenario analysis method helps professionals determine the impact of potential outcomes while making informed decisions at the same time. To do scenario analysis, one has to identify the key variables and change the assumptions with different financial models.

Monte Carlo Simulation: The Monte Carlo model is a computational simulation technique involving the usage of statistics to analyse complex systems. Its main objective is to rely on random events rather than calculated ones. For the Monte Carlo model to work, the numbers have to be randomised and chosen by an automated system and are repeated multiple times. 

Types of Financial Models 

Types of Financial Models 

Financial models can be separated using multiple factors some of which include financial planning and analysis. Others include valuation, forecasting, risk management, and merger & acquisitions. Here are our top picks for the financial models currently in use globally.

Three-Statement Model: The three-statement financial model is a model that predicts the outcome of financial statements like income, cash flow, and balance sheets. 

Starting with income statements, it overlooks the revenues, expenses, and net income over a certain period. The balance sheet offers an overview of the company’s financial position at any given period while showcasing the company’s assets and liabilities. 

The cash flow statement provides a tracking of the cash inflows and outflows in a specified time as well.

Merger and Acquisition (M&A) Models: To understand how mergers and acquisitions work, several models need to be understood. These include the Comparable Company Analysis (CCA), Discounted Cash Flow (DCF) model, merger consequences analysis and Leveraged Buyout(LBO) analysis. Others include transaction multiples analysis, accretion/dilution analysis, break-even analysis, and sensitivity analysis.

LBO (Leveraged Buyout) Models: The LBO model of financial analysis falls under the merger and acquisition model. It undertakes the analysis of the balance sheet, and the company’s inflows and outflows to determine the overall impact. 

The LBO model works with historical financial statements, purchase price and financing structure, debt schedules, and operating assumptions.

Discounted Cash Flow (DCF) Models: Discounted cash flow, as discussed above, is a financial model that offers valuation for a company by investigating future cash flows. It does so by discounting them from the current price. Its main tenets include forecasting future cash flows, determining the discount rates as well as the future cash flows, and calculating the terminal value.

Valuation Models: Financial modelling is made easier using valuation models such as the Comparable Company Analysis (CCA), and Precedent Transaction Analysis (PTA). 

Although both models are used in evaluating the value of the company, CCA primarily focuses on comparing financial metrics with other companies. On the other hand, PTA examines historical mergers or acquisitions to determine the current valuation of the company.

Budgeting and Forecasting Models: Several types of budgeting and forecasting models 

exist for appropriate prediction of the company’s future. 

These include but aren’t limited to traditional budgeting models, rolling forecast models, zero-based budgeting models, driver-based budgeting models, and Monte Carlo simulation. With these models, investment banking careers look bright for enthusiasts.

Building a Financial Model 

Working with a financial model is the first way to move towards building a successful company and establishing its rapport. An investment banking course with placement can teach about the various duties related to the job.

Data Collection and Assumptions: The first step to establishing a financial model is to collect all relevant data and make appropriate assumptions about the future. These include gathering past financial statements —income, cash flow-inflow and outflow, and balance sheet. Establishing these three helps give way to the entire process.

Setting Up Historical Financial Statements: After setting up data collection and making assumptions, it is now time to gather it and place it in sections. These should be done with the historical financial statements with the required format and structure for a clear presentation.

Projecting Future Financial Statements: Once the setting up process is established, companies can then move to a future financial activity. In doing so, the historical data, and assumptions are compiled to calculate the future revenues, cash flows, and all other expenses. The main idea of projection is to measure factors such as customer demand, competitive trends, and pricing.

Implementing Growth Drivers and Key Metrics: This is the part where growth drivers come into the picture. Several types of drivers are incorporated — new products, market share expansion, cost reduction techniques, and geographic expansion. 

Incorporating Debt and Equity Financing: It is seen in most cases that companies often rely on both debt and equity financing to fund their growth. Given the impact that these two can create, they can be beneficial to the growth drivers. Furthermore, businesses can easily access their capital structure, shareholder returns, and interest expense.

Calculating Valuation Metrics: Valuation metrics are one of the most-talked factors when it comes to investment banking. Some popular validation metrics include price-to-earnings ratio (P/E ratio), price-to-sales ratio (P/S ratio), and enterprise value-to-EBITDA (EV/EBITDA ratio). An investment banking certification teaches about the different metrics which can be utilised for better outcomes.

Financial Modelling Best Practices

Financial modelling can be a crucial set of tools and techniques for businesses. However, with time, it has been proven that finding the right financial modelling can require rigorous detailing and adherence. Here are some key points for finding the most effective model for any business:

Consistency and Clarity in Formulas and Formatting: Use only clear and consistent formulas throughout the chosen model. Go for cell references instead of hardcoding values, and other related calculations. Lastly, use straightforward labels and headings for easier navigation.

Using Sensitivity Tables and Data Tables: Sensitivity and data tables are two things that can be implemented to allow quicker access to different variables. Companies can utilise these tools for overall versatility and robustness.

Avoiding Circular References: Circular references are essentially going around in loops with no action. This occurs when the formulas keep referring to their cells thereby resulting in an infinite loop. It is best to maintain clarity by identifying and resolving circular references throughout the financial model.

Properly Structuring Input and Output Sections: One sign of a good structuring format is to separate both inputs and outputs according to the financial model. Input sections include things like revenues, costs, growth rates, and interest rates. On the other hand, output sections include results based on inputs.

Error Checking and Debugging: Financial models ideally include error-checking at multiple points. This is done in multiple regards —input values, and error alerts on incomplete and incorrect formulas.

Documenting Assumptions and Methodology: Clear documentation paves the way for faster presentation and access to the financial model’s activity. This includes retaining source data, the rationale used behind assumptions, and all of the formulas and calculations used through the model.

Excel Tips and Functions for Financial Modelling 

Some of the Excel tips and functions for understanding how financial modelling works are discussed below. Keep in mind that these can be highly efficient for making the most out of financial models.

Essential Excel Functions 

The essential Excel functions used in most financial models are:

  • SUM: The SUM function allows you to add a range of cells without manual counting. 
  • IF: The IF function allows for better logical testing. In return, it returns values for each outcome.
  • VLOOKUP: VLOOKUP allows users to search for a value in a particular column and return a corresponding value from a different column.
  • INDEX-MATCH: Like VLOOKUP, it is a combination of functions for generating the value in a certain range.

Advanced Excel Functions for Modelling 

Investment banking fundamentals include advanced Excel functions which are mentioned below with their functions:

  • NPV: To calculate the net present value of an investment or project by discounting future cash flows
  • IRR: To calculate the internal rate of return
  • XNPV: For calculating the net present value of cash flows that occur at irregular intervals
  • XIRR: To calculate the internal rate of return of cash flows that occur at irregular intervals

Data Validation and Auditing Tools

The different data validation and auditing tools included are:

  • Data validation: To ensure that the data meets certain criteria
  • Conditional formatting: For applying instant formatting to cells based on specific criteria
  • Error checking: For in-built error-checking provided by Excel; for additional troubleshooting

Excel Add-ins for Financial Modelling

Some essential Excel Add-ins for financial modelling include:

  • Solver Add-in: For finding the best possible values for different variables
  • Analysis ToolPak: For performing complex calculations and statistical analysis
  • Power Pivot: For creating data models and performing advanced data analysis

Financial Modelling for Different Industries

Financial modelling is a crucial aspect of valuation and forecasting in multiple industries. One of the best things about financial modelling is that it can be used in almost all industries because of its multidimensional functions. Let us learn more about how it is used in various industries with some financial modelling examples in different domains.

Technology and Startups: Startups rely on financial modelling for understanding the pattern and trends they must adapt to apart from relying on it for tracking balance sheets. Investment banking firms look for startups in the same way they do for larger tech companies.

Real Estate and Property Development: The real estate and property development business is outgrowing the current market. As a professional working in the real estate department, it is ideal to go for financial modelling to detect and analyse cash flows, RPIs, and net income. 

These financial models for property development involve various factors ranging from financing options, and rental rates to occupancy levels.

Energy and Utilities: Energy and utilities are one such area where financial modelling is effective. Starting with the financial impact held by rising energy prices, production volumes, and capital expenditures, it moves forward with ROIs and energy infrastructure projects.

Healthcare and Pharmaceuticals: The healthcare sector seeks financial modelling in terms of financial viability presented by drug development, healthcare services, and clinical trials. These financial models can trace costs related to research and development costs, patent life, reimbursement rates, along with demand forecasts.

Retail and Consumer Goods: Financial modelling can be of great help to retail and consumer goods in that it helps with assessing inventory management, and maintaining optional strategies throughout various activities.

Careers in Financial Modelling

Financial modelling plays a significantly large role in making informed decisions. Let’s discuss how one can make a potential career out of financial modelling in multiple fields.

Financial Modelling Roles in Investment Banking: The crux of investment banking is financial modelling. As a result, investment bankers use it to analyse and evaluate financial data related to corporate finance transactions. 

Financial Analyst and Financial Planning Roles: The roles and responsibilities of a financial analyst and financial planner go hand in hand. Both of these roles require generous functioning of forecasting, valuation, and developing strategies.

Financial Modelling for Private Equity and Venture Capital:

Private equity firms and venture capital funds heavily rely on the financial modeling and evaluation of the viability of projects as well as for assessing ROIs.

Financial Modelling in Corporate Finance and Strategy: In the corporate finance sector, financial modelling can aid analysis of different situations including forecasts.

Conclusion 

Financial modelling can be extremely beneficial to those looking for an enriching experience when it comes to the investment banking market. 

The market is never too dull for an investment banker as it encompasses several unique experiences surrounding market trends and changing statistics.

Now that we have established the importance of financial modelling, let’s move over to the investment banking training offered by Imarticus Learning for finance graduates. The Certified Investment Banking Operations Professional course incorporates some of the most sought-after parameters in investment banking.

For instance, it encompasses chapters focusing on risk management, regulatory compliance, valuation, and trade life cycles within the financial models. The USP of this program is that it relies on a practical approach as opposed to a strictly theoretical approach.

Go for the program today and become an investment banker today!

FAQs

What is 3-way financial modelling?

Three-way financial modelling involves creating a comprehensive spreadsheet that integrates the income statement, balance sheet and cash flow statement, the three main financial statements, to project a company’s future financial performance and position.

How can I do financial modelling?

To start financial modelling, you can start gathering financial data that is available and build spreadsheets that link income, balance, and cash flow, and then analyse the results to make informed business decisions. You will also need to learn data visualization in Excel as well as the fundamentals of accounting. 

What is financial modelling for MBA?

Financial modelling for MBA involves learning how to use quantitative techniques for analysing and projecting a company’s financial performance, thus aiding in decision-making and strategy formulation.

Which tool is used for financial modelling?

Excel is one of the most used tools for financial modelling. It is great for data visualisation as well.

Which is better CFA or financial modelling?

This truly depends on your career goals. CFA is more recognised for investment and financial analysis, while financial modelling offers specific skills in projecting financial scenarios, financial feasibility and analysing business situations.

Does MBA teach financial modelling?

Yes, but it depends on the type of MBA the student is going for. For example, an MBA in marketing might not cover financial modelling but an MBA in Finance will cover the principles of financial modelling.

How Can I Be an Expert in Financial Modelling?

Posted on by Imarticus Learning

Financial modelling is used to create strategies & business models around which the business could revolve. They are used for the evaluation of the performance of any particular firm/company. A lot of processes are performed under Financial modelling like budget analysis, resource allocation, cost analysis, etc. It helps in fruitfully utilising any company’s resources.

Financial modeling course is also used for comparative analysis of any firm’s performance to its competitors. A financial modeller has certain skills that are used for creating business strategies & for predicting the trends. Read on to know more about a successful financial modeller.

Skills Required to Become an Expert in Financial Modelling

  • A good financial modeller can read and analyse financial statements. To build a successful financial model, you will have to be familiar with accounting terminologies like accruals, amortization, revenue recognition, etc.
  • Besides being able to read financial statements, a financial modeller should be able to link various types of account statements which are the income statement, balance statement, and cash flow statement.
  • A good financial modeller has good forecasting skills. Forecasting through data analysis helps in determining the future course of a firm/company & also helps in predicting the upcoming trends. It helps in adapting to changes in the market quickly.
  • To become an expert in financial modelling, you need to have good problem-solving skills. One should be able to simplify complex problems and find solutions to them. Financial statements can get very complex, giving attention to minute details is a must for a financial modeller.
  • Good designing skills are required to build a successful financial model. You need to make the flow charts, tables in such a wat that it could be understood by other employees too. Applications that are used for creating financial models should be known to a financial modeller.
  • A good financial modeller has good presentation and communication skills so that he/she can easily convey business strategies to his/her team.
  • A good financial modeller is familiar with the different types of financial models and when to use them. Different types of financial models are Three Statement Model, Discounted Cash Flow Model, Merger Model, Consolidation Model, and many more.
  • A financial modeller is aware of the taxation processes. He/she is also good at risk identification & management.

Education Required to be an Expert in Financial Modelling

If you have done a degree in MBA and have a bachelor’s degree in accounting, it is perfect for you to enter in the financial modelling field. There are also certain certification courses available on the internet. One should also try to practice to build various financial models with real data set, this will help you in understanding the real-life problems faced while creating financial models. One can also opt for a financial modelling course from any trusted source.

A lot depends on individual performance to be a successful financial modeller. The new-age technologies like big data, artificial intelligence, etc. are also being used in Financial modelling. A good financial modeller is familiar with the latest technologies and uses them to create automation in building financial models. Data analysis is also being used by financial modellers nowadays to analyse big chunks of data & extract meaningful information that can be further used for business forecasting.

A financial modeller is very important to any firm as he/she helps in shaping their business and realising potential opportunities at the right time. It is good to study the fundamentals of Financial modelling to be able to build a financial model. This was all about how one can become an expert in Financial modelling.

Who Can Do Financial Modelling Course?

Posted on by Imarticus Learning

What is Financial Modelling?

Financial modelling is a way through which models are created that contains summarised information on company performance. These models give us inn detail analysis of any particular decision and its impact on the financial status of the company/firm. Any particular fiscal term or financial decision is displayed quantitatively with the help of data/information.

It helps any company to predict/change their future decisions accordingly. A lot of attributes like company forecasting, corporate accounting, decision analysis, etc. are included in financial modelling. In this article, let us see who can take up a course in financial modelling, and what would be one’s expectations?

Who is Eligible for a Financial Modelling Course?

There are no such strict guidelines for taking up this course. One can be a graduate from any particular stream and can take up this course. It is better if someone comes from an accounting background as they will have the prerequisites about accounting & finance analysis which will work as a base for financial modelling.

A lot of work is done on excel or spreadsheets which help in creating a quantitative description of any financial activity. One can find a plethora of courses on the internet and can choose the suitable one. On average, one can complete a financial modelling course in one to three months depending upon the course length.

Key Skills Required for Financial Modelling

Choose a financial modelling course which covers the mentioned topics/skills as these are the most required skills for financial modelling –

  • One must be able to work on excel fluently.
  • Good accounting skills are required, one must be fully aware of concepts like account statement management, depreciation, revenue recognition, etc. You must be able to read/understand/dissect/manipulate financial statements. You must be able to link the income and cash flow statement with the balance sheet.
  • To create a good financial model, one needs to have good forecasting skills, a problem-solving approach, etc. One must be able to present his/her work in a detailed way.
  • Good designing skills on applications which are used to create financial models like excel, spreadsheet, etc. The usage of graphs and analysis helps in making the presentation better.
  • You need to be aware of various types of financial models like DCF analysis, 3 statement model, Sensitivity analysis model, LBO model, etc. One must know about the situations in which these types of models are used.
  • You must have the ability to narrow down a problem into models. You must be able to simplify a problem.

Some key points on financial modeller:

  • There is a lot of demand for a financial modeller. According to statistics, the average salary of a financial modeller in India is 9-10 lakhs per annum.
  • Besides Investment Banking, financial modellers are demanded in Private Equity, Venture capitalist, Corporate development, Real estate development, etc. There is a lot of diversity in this field and can choose according to his/her preferences.
  • It would be a lot comfortable if you are a finance graduate as it will help you in grasping things faster. However, anyone can take up a financial modelling course at any physical institution or an online course like Wall Street Prep, Breaking into Wall Street, Coursera online courses for financial modelling, etc.

Conclusion

Financial modelling is used a lot by firms/companies to forecast their future financial decisions. These models help in finding an in-detail analysis of any financial decision and its loopholes. There are plenty quality courses available online. This article was all about financial modelling and who is eligible for it. I hope it helps!

Is Financial Modelling a Good Career?

Posted on by Imarticus Learning

A career in financial modelling in India is a popular option for aspirants. The immediate proofs of the growth in the field are the startup bubble of the current decade and the accommodating nature of the Indian government. Today, both private companies and public enterprises are looking at sharpening their financial decisions in a volatile market. And helping them in this pursuit are concepts such as financial modelling, quantitative finance, and mathematics.

If you are a student looking to build a career in this niche, you should start by learning financial modelling. The first step would be to create a rough path of your career journey, which will involve education, internship, followed by a job. This will require you to deeply understand the field and the work that you are expected to do. Here is a basic starter guide.

What is Financial Modelling?

Financial modelling is a subfield in the larger corporate finance sector and involves using mathematical models and tools to mimic the performance of an asset or a portfolio. It primarily focuses on understanding the life curve of a financial asset before it is activated. This allows the courses for financial analyst to understand the loopholes and risks in the asset and tweak/plan accordingly when it actually goes live.

Organizations make use of financial modelling to make better decisions when it comes to investments, spending, and taxation. When you learn financial modelling, you will start with these basics and then go on to master the concepts and tools used in it.

What Does a Financial Modelling Career Look Like?

As a professional financial modeller, your job will be to prepare a forecast for a financial asset, a portfolio, or a project. The idea is to mimic its performance in the real finance world and obtain insights. These insights will, in turn, be used to improve the execution of that asset or project.
In corporate finance, financial modelling has a huge scope as companies are constantly looking to improve their financial infrastructure. Following are some of its major applications:

  • Business valuation
  • Capital budgeting
  • Cash flow forecasting
  • Working capital management

Apart from having excellent math skills, you will also need to know a variety of tools that are used in financial analysis. But theoretical understanding will come first, so you should explore financial modelling as a career field before making the jump from your existing path. An online financial modelling course will help you make this decision.

The Scope of a Financial Modelling Career in India

As mentioned above, financial modelling has already taken off in the country. Today, professionals who are expert in financial analysis and corporate finance are considered hot picks and are in great demand. Finance is already a lucrative industry for aspiring professionals and financial modelling acts as a great niche to focus on.
Because it is a field that is still in a nascent stage, the demand for such skills is high. This makes it a good career for finance students who may want to branch out and make themselves employable in the future.
Instead of studying finance in general, why not pick this niche and make a career out of it? At a time when jobs are being cut across industries, a career in financial modelling promises a safe bet. As long as there is money in the world, professions like financial modelling are here to stay.

There is no doubt that financial modelling makes for a good career for aspiring students. The need, then, is to start preparing right now when there is ample time in your hands. Learn financial modelling and kickstart the next phase of your life.

Also Read: What is Scope in Financial Modelling

What is Financial Modeling?

Posted on by Imarticus Learning

Understanding Financial Modeling

Financial modeling can be understood as a process of creating a company’s financial summary based on the income and expenses incurred in a spreadsheet format that can be used to calculate the impact of a major event in the future. It’s a mathematical model that helps to predict the future financial performance of an enterprise or a project based on historical data. It is the numeric representation of all the company’s operations which generates income and incurs the expenditure.

The forecast based on financial models takes multiple factors into account such as historical performance, future assumptions, macroeconomic trends, etc. There are various types of financial models, the most basic one is known as the 3 statement model; it requires preparing income statement, cash flow statement, balance sheet and supporting schedules. Some of the more complex models are discounted cash flow analysis model, sensitivity analysis, leveraged-buyout, etc.

What is the purpose of preparing financial models? Well, there are numerous applications of financial models. Some of the most mainstream uses include financial performance analysis and investment decision making. These use cases apply to both internal and external parties who are interested in the growth prospects of the company. Financial models help an analyst to facilitate complex multi-variable analysis and make models that closely represents a real-world scenario.

Investment-related decision making might include decision regarding the capital structure, acquiring business or assets, growing operations, asset diversification and sale, valuation, budgeting, capital allocation, etc. The internal party has numerous applications of financial modeling when it comes to decision making. Different types of models paint different pictures; it all depends on the inputs and assumptions related to that particular model. It is also used to compare the overall financial performance of one corporation with another or for two different industries.

Best Practices in Financial Modeling

Now that we have understood what financial modeling is all about, let’s jump into some of the best practices in the financial modeling arena.

Model Layout

Financial modeling is all about closely representing the real-world variables that might have an impact on financial performance. The model should focus on simplifying the variables rather than complicating them. It’s paramount to create a financial model in a logical and easy format. You can achieve that by building the complete model on a single worksheet and then use grouping for segregation. This helps to easily expand and contract the models.

Section Flow

The pattern of the flow of contents in the financial model is significant. A commonly used pattern in sections that can simplify your model is as follows (from top to bottom).
• Assumptions
• Income statement
• Balance sheet
• Cash flow statement
• Supporting schedules
• Valuation
• Sensitivity analysis
• Graphical data

Formatting
Formatting the contents of your model properly is considered more as a necessity than the best practice. It is very crucial to differentiate between the inputs and outputs in a financial model. Inputs here can be the assumptions and the calculations can be the output. You can easily apply the basic formatting conventions to reach the standard by making inputs in blue and outputs in black. Other basic formatting conventions in financial models include using borders, shading cells, etc.

Spread-sheet Hacks

As a financial analyst, your primary job is to build financial models on spread-sheet applications like excel. You need to be aware of the best practices in applications like Excel. You need to master the shortcuts and other hacks related to the tools being used. You need to use your keyboard more often and avoid using a mouse for making alterations. You should be mindful of the formulas and should try to keep it short and break down complex calculations into easy steps.

Also Read: Best Way to Learn Financial Modeling